It’s funny how good ideas can find you when you aren’t even looking for them.
What’s PYDS ??
This is what happened to me on Saturday night, when an investor who follows me on Twitter, Graham Jervis, sent a tweet to Ian Cassel, Mackie from Moatology, and me, asking us what we thought of Payment Data Systems (PYDS).
I had only the faintest acquaintance with the ticker, as I had seen some people talking about it on Value Microcaps Motherboard. I had never looked into it at all, though. Because I had previously heard of it, Graham’s question sparked some curiosity in me and I looked at the normal initial things I look at when I want to see if a stock is worth looking into (balance sheet, past couple years’ income statements).
SSKILLZ1: cut English for math
Most importantly, I went and tracked down the comments I had seen but not read on iHub. The bullish comments over the past couple months had mostly come from an investor who uses the moniker SSKILLZ1. He does not have the best grammar, and that combined with his screenname, can lead one to not take him seriously. However, I have paid attention to him for six months now and I believe he is quite sharp. He also has a habit of over-using the term “in my opinion.” Anyway, he knows his microcaps and is very rational about buying and selling.
The PYDS thesis
Here is an incomplete chronology of posts, which on Saturday night got me up to speed quick on the thesis:
- 6/10/2014 – Introduction (?) of idea by Knowledge is King: VMM #161367
- 6/24/2014 – SSKILLZ1 buys in: VMM #161570
- 9/2/2014 – After selling, SSKILLZ1 is buying back in again: VMM #162873
- 9/3/2014 – SSKILLZ1, “impressive” revenue and earnings growth: VMM #162875
- 9/17/2014 – SSKILLZ1, transaction volume growth: VMM #163050
This more or less brings us up to a few days ago. For those who aren’t interested in reading the linked posts, the thesis was basically that PYDS’s growth had exploded throughout the year, and the stock was undervalued.
By the way, PYDS processes credit, debit, and ACH transactions — that is their business.
Lemme get some PYDS
On Friday, November 14, the company released third quarter earnings after the bell. The results were terrific. Revenue grew by 274%. Gross profit grew 739%. Net income flipped from a loss of ($340,000) to $689,000. (The company’s market cap at close Friday was $19.2M — it is now $24.0M.)
As I looked into the opportunity on Saturday night, I thought to myself: if this is available under $0.16 on Monday, it’s a no-brainer. Well, it was available under $0.16 on Monday but I was bidding on something else (with all my spare money) and my Fidelity app was not working on my phone, so I had to try to trade via my iPhone 4’s web browser when I had spare moments at work — very frustrating.
Anyway, on Tuesday I decided I was going to bid for PYDS because it had solidified in my mind as a solid investment. Also, another investor I know and respect had direct messaged me on Twitter, suggesting that I “might like $PYDS.” Well, by now I did, and was willing to put some money behind the payments processor.
I bid all throughout the day Tuesday, finally getting a position around $0.15. There you go: I had hesitated and still got the thing for less than a no-brainer price. Lately, everything I buy has been going down right after I buy it, so we will see if I stay content with my entry.
I know that I haven’t really constructed a thesis for buying Payment Data Systems here. For that, you will have to at least follow the SSKILLZ1 links. But I’d like to address a couple points on the company:
- PYDS has $60.8M in cash — this is not really their cash. Note the Customer Deposits Payable line in liabilities: $58.9m. Maybe PYDS can earn a little interest on it, but not much more than that.
- A major point that SSKILLZ1 has made is that in September, PYDS re-negotiated a number of sales contracts at more favorable terms to themselves (higher margins). He has speculated that these better margins will really boom to the bottom line in Q4 and going forth — they were only applicable to the last month of Q3’s great earnings results. Here is a post from the Savvy Trades and Investments board where SSKILLZ1 explains his theory on PYDS’s margins: STI #5905.
- The COO Louis Hoch sells shares automatically on a regular basis. He still has a very large position. This does not appear to be a red flag.
Finally, here’s a recent quote from SSKILLZ1:
There are very few stocks where I go in where I easily see a path for a double or triple from current levels PYDS has that potential in my opinion if they don’t mess this up. PYDS is a top 10 holding for me for disclosure purposes…
All is just my opinion, and I could always be wrong though.
Disclosure: PYDS is $0.175 at the time of this writing and I am long.